Bankruptcy: just another tool for business?

Two weeks ago, AMR, the parent company of American Airlines filed for bankruptcy reorganization. With this move, American became the last of the legacy carriers (companies who helped pioneer American air travel and existed prior to the 1978 deregulation of the industry) to use the bankruptcy law to restructure its business to lower costs and become more competitive with its rival carriers, including the new breed of low cost carriers who have entered (and exited) the market since deregulation. Observers of the industry will likely call this move of AMR’s inevitable. They will chalk it up as the latest move by the legacy carriers in their painful transition from a business model which worked during the era of regulated markets, where high fixed costs — including a unionized labor force — could be covered by a government regulated route and fare structure, but now must give way to a structure resembling a low cost carrier. Low cost carriers, the exemplar being Southwest Airlines, focus on charging the lowest fares the market can bear. To remain profitable, such carriers depend on frequent flights, no frills (or extra charges for things like food and drink), and often employ low-cost, non-union labor. Federal bankruptcy law has become a popular tool for legacy carriers to get out of labor contracts, force labor concessions on salaries, benefits, and work rules for new contracts, get out of pension obligations which are turned over to the government-sponsored Pension Guarantee Corporation with retirees receiving a fraction of their promised benefit, and the termination of retiree health benefits.

What should make American’s bankruptcy news to readers of this blog was the action of its CEO Gerard J. Arpey. In face of his board approving the bankruptcy filing, he resigned without a severance package or similar form of compensation. A C.E.O.’s Moral Stand

He argued why most of American’s competitors have been profitable the last couple of years. Aside from moves such as reducing capacity (the number of seats available), strategically raising fares, outsourcing less profitable routes to lower cost commuter airline affiliates, buying new aircraft which consume less fuel, and expanding into profitable markets (mostly international), Arpey pinpointed how carriers used the bankruptcy law to break their contractual covenants with labor and suppliers.

This is a departure from how bankruptcy was treated by business in the past: a shameful last resort for a company which managed itself poorly. Often, bankruptcy was accompanied by a company being liquidated or acquired by a stronger company. Now, bankruptcy is viewed as a value-neutral business tool employed to strategically re-position a company to be more competitive, regardless of the collateral damage done to people who have a stake in the enterprise.
Those same industry observers will likely blame labor for driving American and the other legacy carriers into bankruptcy and even liquidation (remember Eastern and Pan Am?) The problem with this argument is that a low cost carrier can be profitable with union labor. Southwest Airlines’ workforce is mostly unionized, achieving its low fares through efficiencies gained with its superior business model (the template for other low-cost carriers) and innovations such as its novel use of fuel futures contracts which make the volatile price of that commodity another fixed, manageable cost for them.

This brings me back to Arpey, who was trying to work with his management team and labor unions to restructure American by adopting a more efficient business model while maintaining the contractual commitments the airline made to its employees and retirees. AMR’s board undercut this effort, joining the competition which used the same bankruptcy law as a value-neutral shortcut to profitability at the expense of the common good of those persons and communities who depended on these airlines for their livelihood. Arpey’s moral stand is a concrete example of what John Paul II wrote in Centesimus Annus (338), when he observed that businesses indeed have economic objectives to meet, but never at the expense of the development of persons or society. It can be argued that the legacy carriers entered the era of deregulation with an obsolete business model which failed to meet the economic objective of profitability, but the means by which they achieved profitability came at the expense of human and social development. And, they achieved this result using a once stigmatized business tool of last resort to cudgel their way to a profitable business model instead of taking the approach Arpey sought: negotiating the restructuring of the company with his now-former employees.

About The Author

Ramón Luzárraga is an assistant professor of theology and member of the founding faculty of Benedictine University in Mesa, Arizona. He holds a B.A. from Fordham University, where he double-majored in political science and theology, an M.A.R. from Yale Divinity School, and a Ph.D. with a focus on systematic theology and ethics from Marquette University. Read more

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